Nigeria: low oil prices increase states’ debt distress

Nigeria’s 36 State governments have been adversely affected by the recent slump in oil prices driven by the collapse in oil revenues shared out by the Federal government among the States. Between June 2014 and March 2015, the Federal revenue pool allocated to the States fell 42 percent to NGN435bn (about $2.2bn).

Federal oil revenue accounts for up to 80 percent of total revenue in some States, underlining the risks many ‘States run given their lack of economic diversification and heavy reliance on one revenue source. With internal revenue-generation capacity remaining weak and domestic debt falling only marginally, the impact of lower revenue is a growing concern,’ an analyst with Ecobank said.

Debt issued by the 36 States remains high, with Lagos State accounting for majority of total States’ debt, while yields remain high (ranging from 10-16 percent), reflecting investors’ concern over further weakening of the currency (naira) and accelerating inflation. Most debt is issued on a medium term basis (5 years and above), reducing rollover risk. However, a number of bonds are expected to mature over the next year, and with the prospect of a return to a bullish oil market remaining slim, debt repayment pressures are likely to rise, weakening market confidence in the ability of some States to manage their fiscal affairs, analysts say.

The decrease in the amount shared from the Federation Account yields increases the prospect that the Federal Government may have to help bail out any State that defaults, although the Federal government is also under pressure given the fall in foreign exchange reserves, high spending commitments and currency depreciation.
There are indications that some States owe workers up to four months of salaries, which has stoked tensions with trade unions leading to increased social unrest. The under- and non-payment of salaries, wages and services by some States will undermine consumer spending, the growth outlook, and confidence.

Some States may use the low oil revenue environment to pursue efforts to boost revenues from other sources, such as the local corporate sector, thereby making progress in diversifying fiscal revenue streams. However, success in boosting non-oil revenues will be reflected in the level of success achieved in diversifying State economies into agro-processing, services and other activities. Currency depreciation, rising inflation, and fuel shortages add to the challenges of successfully navigating through these difficult times.